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How to Negotiate a Merger

So you've href="">shopped for the ideal company to
acquire, and on paper both companies look like perfect mates. Now
brace yourself for the harsh reality of corporate marriage: Just as in real
life, roughly half the time it ends in divorce. More than 50 percent of mergers
fail. Many more would succeed, of course, if both sides knew how to bargain
before either signing or aborting a deal. In this BNET Crash Course, we've
boiled down what many M&A experts preach about the hard process of M&A
negotiating into four basic steps that more companies ought to practice.

Make Your Initial Offer

GOAL: Define the ballpark parameters under which a
deal is possible

Just as a first impression often frames the future of a
negotiation, the initial meeting frames the discussion to follow. As the
acquiring firm, it’s in your interest to make the first offer –
after all, the acquisition is an expression of your overall strategy, and you’ll
be the company responsible for the merged entity’s success.

“Before we negotiate, we always establish why we want
to do this acquisition and the value it will provide, then we let those
analytics drive the negotiating,” explains Smith McKeithen, general
counsel at Cadence Design Systems, a $1.5 billion software firm that has
acquired dozens of companies in the last decade. “You want to be
certain the conversation takes place within the parameters you’ve
defined for the deal.”

Leaving yourself some bargaining room is obvious but crucial.
Assuming you have done all the financial due diligence in valuation, a first
offer generally should represent between 75 and 90 percent of the firm’s
true value. If an initial bid is rejected outright, it is likely the bargaining
won’t end in a contract anyway, so an acquiring company can save
itself a great deal of time and effort with a smart bid.

Hot Tip

Practice Extreme Diplomacy

Creating goodwill at the bargaining table is a crucial first
step. Randall Murphy, founder of the Dallas-based consulting firm Acclivus R3
Solutions, has trained executives in negotiating for more than 20 years. When
it comes to backroom etiquette, he suggests that potential buyers:

  • Set a positive tone. The relationship will evolve
    long after the negotiation; don’t take positions or behave in ways
    that might later make it difficult for everyone to work together. Small
    comments that smack of bluster or derision could undermine big issues and a
    burgeoning relationship.
  • Don’t sweat the small stuff. The
    negotiation isn’t just about inking a deal, it’s also
    creating conditions under which both firms can thrive. Visualize what the
    alliance is intended to accomplish and use that as the basis for figuring out
    the details.
  • Build bridges between opposing positions. Find
    creative ways to make everyone’s objectives emerge from the final
    agreement. The last thing you want is for one side to feel that it “lost”
    a battle.
  • Don’t forget the employees. Don’t
    underestimate the long-term importance of earning the goodwill of employees –
    on both sides.

Negotiate the Terms

GOAL: Generate a detailed agreement that will lead to
successful integration

Once the initial offer is made, more complicated bargaining
begins. What’s important isn’t just the final dollar figure
the two parties zero in on but the rationale presented — particularly
by the selling company — with each offer and counteroffer. For the
acquiring firm, those rationales act as a critical valuation tool, according to
Waltham, Massachusetts-based investment banker Doug Brockway, who as
managing director at Innovation Advisors has helped a dozen mid-market
technology companies negotiate and execute mergers.

“Because the business of the seller’s firm
must be described in detail in order for negotiations to be meaningful,”
Brockway says, “the negotiation becomes an extension of due
diligence, allowing you to better assess whether your original impression of
the firm and its value were correct.”

Financial negotiations also allow the buying firm to probe
issues that might affect the success of the merger, such as unexplained
variations in the other company’s revenues.

“You should emerge from the financial discussion with
a very clear picture of exactly what you’re buying,” says
Lance Urbas, CEO of Westwood, Mass.-based security software firm IntelliReach,
who has completed several acquisitions throughout his career.

As you learn more about the selling company during the
negotiations, do constant fact-checking of everything presented. Edward Weiss,
who served as general counsel for Lanham, Md.-based Group 1 Software when it
acquired several firms and was later acquired by Pitney Bowes, explains: “The
more critical the piece of information, the more skeptical you should be.”

The Legalese

Do They Really Own Their Products?

If you don’t already have lawyers doing this for
you, here is a do-it-yourself list of tasks to ensure that the company you’re
buying has legal rights to all their products:

  • Check the href="">U.S. Copyright Office for any registrations that conflict with what the seller is offering.
  • Check the href="">U.S. Patent and Trademark Office for any trademarks that conflict with their brand names and to ensure that any
    patents they’ve filed don’t have obvious problems.
  • Do a LexisNexis search for liens, litigation, or legislation
    that could affect acquired assets.
  • Create a list of every employee and contractor who designed
    any product or process in the selling firm. Confirm that there is contractual
    ownership of all contributions.

Source: Edward Weiss, counsel at Bregman, Burbert, Schwartz,
and Gilda

Negotiate the Personnel Issues

GOAL: Ensure that the talent you’re
acquiring remains in place and productive

Two general rules should govern negotiations about how many and
which types of jobs will make up the final agreement, according to Dennis
Weldon, director of corporate development and investor relations for Mentor
Graphics, an Oregon-based software firm with revenues of $825 million, which
has acquired more than 20 companies over the past ten years.

1. Avoid pressure tactics. A merger negotiation can often
be an emotionally charged process from the start. Overly aggressive tactics can
end up alienating the very people you’ll need to make the acquisition
work. When acquiring much smaller firms, for instance, Weldon says he’ll
often help the seller find better representation at the bargaining table.

2. Use time to your advantage. Often the seller isn’t
really ready when you first enter negotiations, so you should plan for breaks
in the negotiations so that all the parties can consider the wisdom of going

Danger! Danger! Danger!

Beware of Cultural Landmines

Brockway, the investment banker and managing director at
Innovation Advisors, cautions that M&A negotiations sometimes founder
on cultural issues:

  1. What will be the title of the top manager of the selling
    firm after the merger? The titles CEO and president are big status symbols to
    employees of the selling firm – consider title changes carefully.
  2. Will the company name and brand name survive the merger?
    Employees can be fiercely loyal – not just to a company or a product
    but to their names as well.
  3. Where will the new headquarters be located? Unless the
    two companies are located very close together, the prospect of relocation can
    be a game-changer for many key employees.

Draw Up the Contract and Get It Signed

GOAL: Complete the process and move forward to the

Negotiations don’t end when you go to contract; it’s
often the negotiating of the specific terms that causes the biggest problems.
The best way to ensure a smooth contract process is to document all those
decisions and commitments made during the bargaining phase. Then, when verbal agreement
is reached, review the main points and obtain an agreement from both parties
not to surface additional issues.

To this end, it’s important to keep the corporate
lawyers on a short leash, Brockway says. “It’s easy for a
lawyer to turn a contract into a bone of contention, especially on minor
issues,” he says. Thus, while details may emerge that weren’t
anticipated, you should try to keep the discussion tracked to what was verbally
agreed upon.

It’s also a good idea, well before signing, to get key
individuals from both firms together to begin planning merger integration.
Mentor Graphics, for example, aggressively courts its soon-to-be-acquired
employees. “We find that they’re more likely to remain if
we take the time and trouble to let them see that Mentor is basically a good
company to work for,” explains Weldon.

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